A FICO credit score ranges from a low of 300 to a high of 850. The higher the credit score, the better. A high credit score can qualify you for a lower interest rate on loans and zero percent interest on credit cards. Negative items on a credit report, including bankruptcy, can impact that score and your financial health.
Identification
A bankruptcy is a court proceeding that allows consumers and businesses to either repay their debts or eliminate them completely. Five kinds of bankruptcy are the most common. Chapter 7, referred to as liquidation, occurs when a consumer is legally relieved of all responsibility for his debts and must surrender nonexempt property as a result. In Chapter 13 bankruptcy, a consumer restructures his debt and agrees to repay the creditor over a period of time set by the courts. Chapter 11 is used by wealthy individuals or corporations to reorganize debt and remain in business. Chapter 9 is similar to Chapter 11 except it's for municipalities only. Chapter 12 is filed by farmers and fisherman to reorganize debt and makes payments over a three-year period.
Effects
According to MyFico, 35 percent of your FICO score reflects how well you pay your bills. This percentage takes into account late payment of debts but also other derogatory payment occurrences, such as judgments, charge-offs, tax liens and bankruptcy. A bankruptcy indicates a failure to honor a number of financial debt obligations and will lower your credit score by approximately 160 to 220 points, according to the Electronic Privacy Information Center. How much a score drops depends upon the other factors present on the report.
Considerations
Credit report rights are governed by the Fair Credit Reporting Act (FCRA). Under the FCRA, negative accounts can only remain on a credit report for up to seven years. There are exceptions, however, and bankruptcy is one of them. When it comes to bankruptcy, discharged Chapter 12 and Chapter 13 fall under the standard reporting time frame of seven years; however, Chapter 7, Chapter 11 and non-discharged Chapters 12 and 13 bankruptcies can remain on the report for up to 10 years.
Expert Insight
Although the FCRA limits the amount of time a bankruptcy can appear on a report, that doesn't mean the consumer is therefore free of the bankruptcy's effects on her financial life. According to financial expert Dave Ramsey, a bankruptcy can negatively impact you for a lifetime, not just seven years. Loan applications often ask an applicant if he has filed for bankrutpcy at any point in her life, not just in recent years. Some employment applications ask this question as well. If you've filed bankruptcy, this may prevent a business or employer from doing business with you or hiring you for a position. If you lie about it to receive a loan, this could be considered fraud.
Warning
A bankruptcy can lead to a poor credit score. There is a market of subprime lenders that provide loans and credit cards to consumers with damaged credit. These credit products often come with terms that are less favorable than those offered by traditional lenders. Subprime credit may have a higher interest rate, which means you pay more for that extension of credit over time. Also, beware of companies that offer to repair your credit. According to the Federal Trade Commission, this could be a scam. Under the FCRA, credit bureaus are not required to remove accurate data from a credit report, even if that information is negative.
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